Singapore Mortgages and Home Loan: Banking regulatory and pro-cyclical behaviour (behavior).

Article by Property Buyer Singapore Mortgage Consultant

Singapore Mortgages and Home Loan: Banking regulatory and pro-cyclical

behaviour (behavior). Explaining pro-cyclical behaviour (behavior).

Yet another word that has come to prominence recently is

the word “pro-cyclical”.

Rising Market, Rising prices

For example in the case of the Singapore Home Loans, when the market

was rising, banks raised their lending to 90% on valuation or

whatever the regulatory framework allows them. This is like adding

fuel to fire, adding more frenzy to the market. This creates even

more upward pressure and speculative pressure on Singapore property

prices. With rising house prices, builders will build more, estates

will be upgraded en-bloc because they can sell at ever higher prices

due to easy credit and perhaps positive economic conditions.

When Markets Stop Rising

When the markets start to drop, property prices come falling down.

Banks see the risk to their collateral falling below the money owed

to them and started to tighten credit. Instead of being able to lend

up to 90% of valuation of the property, they are only willing to lend

at 80%, even 70% or stop lending out-right for home loans. When the

markets are weak, this further exacerbate an already bad Singapore

economic situation.

So all these are pro-cyclical behaviour.

Why do Banks do it?

The banks are commercial entities, their charter is to make money. So

it is very natural for them to start to recall loans (i.e. take back

the loans) when they view a business as failing so as to retrieve the

loans they lent out. For properties, when the market is falling, it

is natural that they want to quickly get their money back or NOT lend

so much.

The Market is like a Cinema, the audience is like the banks

The market is like the cinema, when the markets are in distress, it

is almost as if the cinema is on fire.

Instead of collectively putting out the fire, some of the audience

will rush for the exits. Once a few people start to rush for the

exits, the rest of the audience panic and start to rush for the

exits, causing a stampede and deaths. The last ones out get burnt.

You cannot blame the banks

This is a natural behaviour and the banks cannot be blamed, because

this is the time when Government leadership becomes imperative.

Government leadership

Make banks lend, help them lend when the markets are down. Reduce

lending when the markets are hot. This is counter-cyclical to the

economy and requires leadership, discipline and courage.

So when the banks are making huge profits, instead of leveraging more

and lending more, they should instead slow down lending or build

reserves. And when the market is down, they should lend our more,

using those reserves.

If the governments do not step in, banks will risk ruin if the

government is not backing up the loans that they lend out. So this is

when government leadership comes in.

Singapore’s Government Understands the situation – But could do

more

Singapore government has been quick to realise this and have backed

banks losses up to 80% for lending to Small and medium enterprises

(SME), this is a good move to loosen credit to the SMEs. The Singapore

government is generally on the right track, but we think there are

areas it should and could do more. Such as helping banks to lend out

money to would be property buyers by backing banks with some possible

losses. This will help support the market. For those home owners who

has equity in their homes, help the banks to make it easier for them

to obtain equity loans (Cash out), as this could help the markets to

stabilize quicker.

US Government

The US government led by Obama fully understands the economy and are

doing all it can to shore up the economy. Obama government is

discussing how it will enact regulatory oversight to build in counter-

cyclical elements. During the boom times, banks should build up

reserves for the downturn, so as to be able to lend during the

downturn. We have been advocating that banks should play a role as an

economic lubricant to facilitate credit when markets are down and

tighten credit when markets are up.

About the Author

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